On June 16, 2016, the U.S. Supreme Court issued an opinion on awarding attorneys’ fees in copyright cases for the first time in two decades and issued the first copyright case in two years. The case is Kirtsaeng v. John Wiley & Sons Inc., case number 15-375. Section 505 of the Copyright Act provides that a district court “may . . . award a reasonable attorney’s fee to the prevailing party.” The issue presented to the Supreme Court was whether a court, in exercising that authority, should give substantial weight to the objective reasonableness of the losing party’s position. The court held that it should but that courts must also give due consideration to all other circumstances relevant to granting fees. It further held that the district courts retain discretion, in light of those factors, to make an award of attorneys’ fees even when the losing party advanced a reasonable claim or defense.

Kirtsaeng, who was from Thailand, came to the U.S. to go to Cornell University. While there, he discovered John Wiley & Sons, an academic publishing company, sold virtually identical, English language textbooks in the U.S. and Thailand, but sold them at a much cheaper price in Thailand. He had family and friends in Thailand buy the books, ship them to him in the U.S. and sold them at a profit.

Wiley sued Kirtsaeng for copyright infringement, claiming Kirtsaeng’s sale of the books violated its exclusive right to distribute its textbooks. Kirtsaeng invoked the “first sale doctrine” as a defense, which enables the lawful owner of a book (or other work) to resell or otherwise dispose of it as he or she wishes. Wiley countered that the first sale doctrine did not apply to books manufactured abroad. The circuit courts were split on the issue, and the issue went up to the Supreme Court. The Supreme Court agreed with Kirtsaeng and held that the first sale doctrine does allow the resale of foreign made books.

Kirtsaeng went back to the district court and sought $2 million in attorneys’ fees as the prevailing party pursuant to section 505. The District Court denied the motion, relying on Second Circuit precedent that gave “substantial weight” to the “objective reasonableness” of Wiley’s infringement claim. The rational for that approach was that the imposition of a fee award against a copyright holder with an objectively reasonable—although unsuccessful—litigation position will generally not promote the purposes of the Copyright Act. The District Court and the Second Circuit, on appeal, agreed that Wiley’s position was reasonable. They also found that the other factors to be considered did not outweigh the reasonableness finding. These non-exclusive factors were set forth in Fogerty v. Fantasy Inc., 510 U.S. 517 (1994). In that case, the Supreme Court identified the non-exclusive factors as the frivolousness of the case, the loser’s motivation, the objective unreasonableness of their case, and considerations of compensation and deterrence, all of which are to be applied in a manner that’s faithful to the purposes of the Copyright Act.

In Kirstaeng, the Supreme Court explained that objective reasonableness can be only an important factor in assessing fee applications—not the controlling one. District courts must take into account a range of considerations beyond the reasonableness of litigating positions. Thus, a court may award fees even though the losing party offered reasonable arguments. The Supreme Court cited as an example the situation where a court orders fee-shifting because of a party’s litigation misconduct, or the court decides to deter repeated instances of copyright infringement (i.e. copyright infringement “trolls”). “Although objective reasonableness carries significant weight, courts must view all the circumstances of a case on their own terms, in light of the Copyright Act’s essential goals” (for instance—enriching the general public through access to creative works).

The Supreme Court concluded that the Kirstaeng matter should be remanded to the District Court because it appeared that the court had put too much emphasis on the “reasonableness” question. Thus, the Supreme Court ordered the remand to ensure that the District Court evaluates the motion consistent with the analysis that it set forth—giving substantial weight to the reasonableness of Wiley’s litigating position, but also taking into account all other relevant factors.

In a continuing trend of rejecting bright-line rules and multi-faceted tests created by the Federal Circuit, the Supreme Court last week issued an opinion in Halo Electronics, Inc. v. Pulse Electronics, Inc., (No. 14-1513) in which the Court unanimously vacated and remanded the Federal Circuit’s decision affirming the District Court’s decision not to award enhanced damages under the Federal Circuit’s precedent in In re Seagate Technology, LLC, 497 F.ed 1360 (Fed. Cir. 2007) (en banc). The Court found that the Seagate test was too rigid and did not give trial courts sufficient discretion to award enhanced damages under 35 U.S.C. § 284. Chief Justice Roberts wrote the decision for the Court.

Background

The Patent Act provides that the Court “the court may increase the damages up to three times the amount found or assessed.” 35 U.S.C. § 284. In response to this language, the Federal Circuit has created various tests for courts and litigants to following, culminating with its most recent pronouncement in Seagate. Under the Seagate test, “a patentee must show by clear and convincing evidence that the infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent,”without regard to “[t]he state of mind of the accused infringer.” This objective prong is not satisfied if the accused infringer later developed a reasonably defense at trial, even if that defense was not known or relied on during the time of the infringing conduct.

If the patentee can demonstrate objective recklessness, it must show by clear and convincing evidence that the risk of infringement “was either known or so obvious that it should have been known to the accused infringer.” If the patentee meets this subjective prong, the court is entitled to award enhanced damages.

The Supreme Court Rejects this 2-step Process

While initially recognizing that “[t]he Seagate test reflects, in many respects, a sound recognition that enhanced damages are generally appropriate under § 284 only in egregious cases,” it found that the test “is unduly rigid, and it impermissibly encumbers the statutory grant of discretion to district courts.”

In particular, the Court was troubled by the fact that an accused infringer could avoid enhanced damages in cases where it intentionally ignored the patentee’s patent if its lawyers could later develop a reasonable defense during litigation that was never relied on previously. Under the Seagate test, a patentee could never get past the first objective prong.

Having said that, the Court also stressed that enhanced damages should still be the exception, and not the rule. It traced the history of enhanced damages and noted that they were typically reserved for egregious cases and were “vindictive or punitive” in nature. The Court cautioned that a trial court’s discretion to grant enhanced damages is not boundless and that the Federal Circuit is in a unique position to evaluate the exercise of that discretion based on its long history of dealing with patent cases.

Finally, the Court rejected a clear and convincing evidentiary standard for proving entitlement to enhanced damages. Under § 284, only a preponderance of the evidence is necessary to obtain enhanced damages.

The Court concluded by stating:

Section 284 gives district courts the discretion to award enhanced damages against those guilty of patent infringement. In applying this discretion, district courts are “to be guided by [the] sound legal principles” developed over nearly two centuries of application and interpretation of the Patent Act. . . . Those principles channel the exercise of discretion, limiting the award of enhanced damages to egregious cases of misconduct beyond typical infringement. The Seagate test, in contrast, unduly confines the ability of district courts to exercise the discretion conferred on them. Because both cases before us were decided under the Seagate framework, we vacate the judgments of the Federal Circuit and remand the cases for proceedings consistent with this opinion.

Justice Breyer’s Concurrence

While agreeing with the majority’s opinion, Justice Breyer wrote separately to caution that awards of enhanced damages should be made only in egregious circumstances.

He also noted that an award of enhanced damages requires conduct beyond simple knowledge of a patent by the infringer. Justice Breyer explained that there are several legitimate reasons why an infringer may be aware of a patent that do not rise to the level of willful misconduct required. He also noted that opinions of counsel of non-infringement or invalidity are not required to defeat a claim for enhanced damages. For one thing, they can be extremely expensive and can deter legitimate innovation or otherwise upset the proper balance between the patent laws and promoting the progress of the science and useful arts.

Finally, he noted that enhanced damages are not a mechanism for compensating patentees for litigation expenses or other infringement-related costs. There are difference statutory provisions that address those concerns.

Conclusion

This is yet another case in which the Supreme Court has struck down a bright-line rule or multi-faceted test developed by the Federal Circuit. The Federal Circuit has tended to create these rules and tests in an effort to provide more clarity and certainty in the patent arena, even if these rules and tests lack a strong statutory basis. In contrast, the Supreme Court seems less concerned about clarity and certainty, and is more concerned in treating the patent laws like any other area of the law. It has repeatedly rejected efforts by the Federal Circuit to treat the patent laws as somehow different than other laws or not bound by the same rules and procedures. The Halo decision is another decision that brings the patent laws closer to the rest of the law.

OUR LAW FIRM: HOUSTON HARBAUGH IN PITTSBURGH

Contact our Pittsburgh Intellectual Property Attorneys at Houston Harbaugh, P.C. through IP Section Chair Henry M. Sneath at 412-288-4013 or sneathhm@hh-law.com. Some posts herein were published by the law firm Picadio Sneath Miller & Norton, P.C. (PSMN®) which has merged with Houston Harbaugh, P.C. and are used by permission.

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